Tuesday, January 5, 2010

Boulder in the Road

The Lehmann Letter ©

This blog has discussed the foreclosure crisis in earlier postings. Foreclosure is a tragedy for the families who lose their homes. It also impedes economic recovery by prolonging the real-estate slump. Foreclosed properties drag down home values and residential construction by swelling the glut of unsold houses. The larger the glut, the slower the recovery in real-estate prices and the smaller the incentive to build new homes.

See Peter S. Goodman’s January 2 New York Times article for an excellent commentary on the problem: http://www.nytimes.com/2010/01/02/business/economy/02modify.html

Mr. Goodman points out that the Obama administration’s efforts to relieve the real-estate crisis by reducing borrowers” interest payments have not effectively reduced foreclosures.

Mr. Goodman says:

“Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.”

Mr Goodman continues:

“In 2008, more than 1.7 million homes were “lost” through foreclosures, short sales or deeds in lieu of foreclosure, according to Moody’s Economy.com. Last year, more than two million homes were lost, and Economy.com expects that this year’s number will swell to 2.4 million……

“’I don’t think there’s any way for Treasury to tweak their plan, or to cajole, pressure or entice servicers to do more to address the crisis,” said Mark Zandi, chief economist at Moody’s Economy.com. “For some folks, it is doing more harm than good, because ultimately, at the end of the day, they are going back into the foreclosure morass.’”

“Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.

“Increasingly, such borrowers are inclined to walk away and accept foreclosure, rather than continuing to make payments on properties in which they own no equity. A paper by researchers at the Amherst Securities Group suggests that being underwater “’is a far more important predictor of defaults than unemployment.’”

And here’s the point:

“Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. He pointedly rejects the notion that government ought to get out of the way and let foreclosures work their way through the market, saying that course risks a surge of foreclosures and declining house prices that could pull the economy back into recession.”

Finally, Mr. Goodman makes clear that the Obama administration in general and Treasury Secretary Geithner in particular understood the risk they were taking when they failed to provide an avenue for the reduction of home-loan balances:

“The biggest source of concern remains the growing numbers of underwater borrowers — now about one-third of all American homeowners with mortgages, according to Economy.com. The Obama administration clearly grasped the threat as it created its program, yet opted not to focus on writing down loan balances.

“’This is a conscious choice we made, not to start with principal reduction,” Mr. Geithner told the Congressional Oversight Panel. “We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness.’”

Perhaps……. But those foreclosed homes – and all the future foreclosures that will be dumped on the market – now sit and will sit like a boulder on the road to economic recovery.

© 2010 Michael B. Lehmann

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